Friday 2 September 2011

HYP Watch List: Thomas Cook (TCG)

As always, I continue to be on the lookout for good new dividend-paying shares for my High Yield Portfolio. These high-yield shares form Level 6 on the DIY Income Investor Income Pyramid).

As I have just returned from holiday, it seemed appropriate to revisit Thomas Cook, the famous FTSE 250 travel company. Does it fit the bill - or is it potentially a 'holiday from hell'?

A recent article on Motley Fool identifies Thomas Cook (TCG) as a potential 'downtrodden company' with 5-star recovery potential.  The screen used looked at the worst 100 fallers in the FTSE All Share and AIM, using the following criteria:
  • Price to earnings ratio (P/E)
  • Price-to-sales ratio (PSR)
  •  Price to book value (P/B)
  •  Dividend yield
TCG scored highest on these criteria - in particular, the dividend yield is nearly 25% (if you can believe that!).

The company has had a bad year as many would-be UK holidaymakers decided they couldn't quite afford the expense this year. Thomas Cook's shares started out the year around the £2 mark, but have fallen to just 42.5p (at the beginning of September 2011).

However, another recent Motley Fool argues that this is currently priced to go up or go bust, and in a follow-up article the same author suggests that this is one to avoid - except for the most speculative of investors. The article notes that the 20%-plus fall over the past month is one-part market movements, one-part industry woes, and one-part self-inflicted injury. The company has compounded the effect of Middle East unrest on its main destinations with management failings and a spate of management departures.

Its franchise may be strong enough to bounce back from the lowly rating. It is merging with Cooperative Travel to consolidate its strength on the high street, which is still responsible for 65% of package holiday sales. It has also acquired a majority of the former Russian state monopoly tourist organisation Intourist, which is a massive potential market (although it has to be said  that most Russians are looking for very cheap holidays).

But debt nearly double its market capitalisation (£900m, against a market cap of £500m) and fears over banking covenants means a possible rights issue is the least of investors' worries.

So, although I enjoyed my own holiday, this holiday provider is not for me!

Update (November 2011) - and just as well I steered clear. After it was revealed that TCG was talking to its bankers the share price plummeted. Although an increased credit line was agreed, and the share price recovered somewhat, 1000 jobs cuts were announced. It is still too early to tell when - if ever - the company might be a candidate for my High Yield Portfolio. 

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. Thomas Cook are mentioned in an Investors Chronicle article called "Super Fit Shares", in the "Shares to avoid" section of the article.

    Apparently it was the 10th riskiest share overall!

    Like you, Moneyman, I'm staying clear of them.

  2. @Amateur Investor
    Yes, and now halting its dividend - looks like a good call....